Archive for April, 2009

Dairy industry leaders gathered in April in Washington, D.C. to practice an industry-wide response plan that would be activated in the event of a situation that called into question the safety of consuming dairy foods.

“Dairy producers, through their checkoff investment, are driving an industry-wide initiative that helps ensure the dairy industry can protect public health and the long-term interests of the dairy industry in the event of a crisis,” said Stacey Stevens, director of nutrition and industry affairs for Dairy Management Inc (DMI). “This training was an opportunity to practice, to face the unthinkable and to learn from it. At the end of the day, the participants left with an appreciation of how the government, processors, producers and exporters must work hand-in-hand to communicate quickly, accurately and effectively with the public in a dairy-related crisis.”

DMI, in cooperation with other national dairy industry organizations, launched the dairy industry’s Crisis Readiness Program in 2001. The program entails:

·Useful crisis preparation and response materials and resources that integrate with the government’s Incident Command System

Dairy producers can learn more at www.dairyresponse.com. The site features contact information for state and regional dairy organizations and dairy animal health professionals; background on potential issues; and communications tips. During a crisis situation, the site will provide news updates and links to government information about the operational response. As DMI monitors the currentH1N1 Flu Virus (“Swine Flu”)situation, the site will be updated with information pertinent to dairy producers.

DMI will repeat this training workshop in other regions of the country over the next few years.

The National Dairy Leaders Conference, held April 20-21, near Denver, featured a panel discussion on “Milk for manufacturing: How should it be priced?” The discussion was a forum on end product pricing, featuring Dave Fuhrmann, Foremost Farms USA; Geoffrey Vanden Heuvel, California Milk Producers Council; and Jeff Williams, Glanbia USA. A summary of the discussion follows.

Fuhrmann: Unintended consequences

“The current system of end product pricing has produced ‘unintended consequences,’” Fuhrmann said.

Those include:

• negative “other solids.” Under component pricing, the value of protein is primarily based off the cheese market; the butterfat value is primarily based off the butter market; the “other solids” value is based off the whey market. “For the last six months, the value of the whey has been less than the ‘make allowance’ to process the whey into powder, so producers receive a ’negative‘ value or deduction from their milk check for other solids,” Fuhrmann said. “If you’re a dairy producer trying to maximize the value of your animals and your milk – using genetics and feeding – a negative value for other solids sends the wrong signal.”

• negative producer price differentials (PPDs). Typically a higher Class I price adds value to the blend price. There are times – happening more frequently – that that number has been negative. There’s a huge negative impact on producers who use forward contracting.

• the lag between market changes and producer payments. “When you are paying producers for a commodity – milk – processors and producers should be able to respond to market conditions. With the volatility we’ve had, the lag sends the wrong message to dairy producers,” Fuhrmann said.

For example, on Dec. 1, 2008, Chicago Mercantile Exchange (CME) cheddar blocks sold for $1.79/lb. By Dec. 31, the price had dropped to $1.1325/lb. The December CME price averaged $1.6123/lb., but the average price used by USDA to calculate federal milk marketing order Class III price – using a National Ag Statistics Service (NASS) survey – was $1.7544/lb. As a result, dairy farmers received a December Class III price of $15.28/cwt. on their milk checks received in the middle of January. In addition, many Midwest producers received quality and volume premiums of $1/cwt.

“You really don’t get a sense of how bad it is until you get the check in the mail,” Fuhrmann said. “We in the industry realized what was going on, and with a $15.28/cwt. Class III price, the signal we were sending to our dairy producers was that it wasn’t that bad.”

On Jan. 7, CME cheddar blocks sold for $1.0725/b., and on Jan. 31, the price was $1.15/lb., for a monthly CME average of $1.1358/lb. However, with the lag in reporting, the January 2009 NASS average was $1.2961/lb., and resulted in a Class III price of $10.78/cwt., plus premiums.

On Feb. 1 and Feb. 28, the CME cheddar block price was $1.15/lb. and $1.1750/lb., respectively, and the February CME average was $1.1785/lb. The NASS average for February was $1.1518/lb., yielding a February Class III price of $9.31/cwt., which was reflected in the milk check producers received in mid March.

“So the check producers received in March actually reflected the market conditions on Dec. 31, 2008,” Fuhrmann said. “That lag is too long. The reverse happens when prices are rising quickly. Producers aren’t receiving the economic signal as quickly as they should, and it’s a major flaw in our system.”

“We’re probably never going to find a system everyone will agree on,” Fuhrmann said. “I don’t think anyone likes the current pricing system, but it becomes the degree of how bad everybody dislikes it.”

Furthermore, the “make allowance” issue splits manufacturers across the country. Every plant has different manufacturing costs. It’s a controversial issue that we’ll probably never get resolved, he said.

He recommended eliminating end product pricing formulas, and reverting back to a system similar to the old Minnesota-Wisconsin (M-W) price series, which allows competitive pricing methods and establishes prices for two classes of milk: Class I, for all packaged fluid milk; and Class II, for all milk used in manufactured products. He admitted that system may not work in regions where there is limited competition for milk.

Vanden Heuvel: Tweak, don’t toss

While there are problems with end product pricing formulas, they have only been in use for 8-10 years, said Vanden Heuvel.

”With any system there will be bumps,” he said. “There’s nothing fundamentally wrong with the product pricing system. But, there are problems, and it requires care to get it right.”

One problem Vanden Heuvel identified is that “end product pricing formulas require good data … something that has been lacking.”

USDA should have established a “cost auditing unit” when end product pricing was implemented, including measuring manufacturing costs and yields at plants, he said. “If those factors are going to be used to price milk, then we have to know what it costs to manufacture butter, powder and cheese. It must also reflect improvements in manufacturing efficiencies.”

“The only reason it has worked as well as it has for cheese and butter is because California manufacturers have to pay for milk based on CME cheddar 40-lb. blocks and CME butter,” Vanden Heuvel said. “To protect their markets, California manufacturers must pay for milk based on those prices. That forces the rest of the industry to follow.”

There have been tremendous problems in reporting nonfat dry milk prices to NASS in recent years, Vanden Heuvel noted. California’s weighted-average nonfat dry milk price formula is troublesome because one large firm controls 90% of the powder sales. There’s no competition, and that influences NASS. He recommended using the CME spot nonfat dry milk price.

CME has come under criticism as being subject to market manipulation.

”There are plusses to CME, and it’s a mistake for producers to criticize it,” Vanden Heuvel said. “We should try to improve CME transparency. But all the buyers try to manipulate the price down; all the sellers try to manipulate the price up. To the extent each of them is successful each day is based on supply and demand, and that’s what you want to know. CME reflects real-time market discovery. It’s the best tool we have. It reflects the supply and value.”

With the advent of whey as an increasingly important food ingredient, Vanden Heuvel said establishing a value for whey in the milk price needs work.

“The whey industry has become mature enough so that producers are entitled to some share of the value of the whey stream,” he said. ”But, we need to recognize the cost relationship between whey and its conversion to a marketable product, compared to other products.”

With cheese, butter and powder, the end product is worth 6X-8X the cost to make the product, he explained. But with whey, the end product value/cost ratio is less than 1.5:1, and, in the past six months, the cost to make the product exceeds the value of the end product. Producers are subsidizing the manufacture of whey, and that’s not the purpose of milk pricing formula.

“Most cheese varieties price off the CME cheddar price,” Vanden Heuvel said. “Even if you’re making mozzarella, if the cheddar price is moving up, the mozzarella price moves up. There’s much less tracking on various dry whey products. That requires that we treat whey differently.”

He recommended establishing a base value for whey, with some sharing of upward movement when the value of whey moves higher. It should never be a “negative” to the producer. But, it’s an evolving industry that requires a lot of capital to be invested in whey processing.

“While the minimum price formula ought to capture most of the value of commodity-size butter, powder and cheese, the regulated system should leave some value of whey on the table for those who invest in whey processing, and as a buffer to deal with price inversions,” Vanden Heuvel said. “We have to encourage innovation in this area, so we can’t grab every dime out of that portion.”

Williams: It works well

Operating plants in areas not regulated by federal/state milk marketing orders, end product pricing has worked well for Glanbia and its predecessors for a quarter century, Williams said.

“We have a model that works in Idaho, and a modified system that’s working at Southwest Cheese in Clovis, New Mexico,” he explained. The practice has helped lead to rapid growth in Idaho’s cheese production.

Using a variation of systems used in California and federal orders, Glanbia establishes values for milk based on the product yields for cheese, whey, dry milk and butterfat products. It pays for components (protein/fat) produced at the farm. Each formulas is slightly different, but is usually based on published commodity prices from CME, NASS and USDA’s weekly Dairy Market News.

Citing Idaho’s growth in milk production, Williams said end product pricing helps determine the fair value of milk and encourages innovation in the dairy industry, especially for export markets. That leads to plant expansion and industry growth.

Williams said Glanbia was considering future changes to its end product pricing formulas, including testing and paying for casein, and considering whey pricing changes to more accurately reflect product mix.

Earlier this year, I used the metaphor of elephants stampeding a village to describe challenges facing the dairy industry (“Elephants are approaching,” February 2009 Western DairyBusiness). In late April, I attended the National Dairy Leaders Conference (NDLC), near Denver, and there was a very big elephant in the room – the current relationship between milk prices and input costs.

From the bus tour to the DeHaan family’s Great Western Dairy, near Ault, Colo., to the shuttle back to the airport, economic conditions were the major topic. Western producers seemed most negatively impacted, with many citing losses of $3-$5/cow/day, or more than $100,000/month/1,000 cows.

Dan James, Mountain Plains Farm Credit Services, said people are underestimating the extent and impact of the dairy economy. While losses of $210-$350/cow/year ($1.00-$1.50/cwt.) were considered serious in the past, they were generally short term. Now, producers are losing $100-$200/cow/month, and James projects losses of $500-$750/cow for the first six months of 2009 alone.

Marv Hoekema, Dairy Decisions Consulting, Visalia, Calif., said he expects “supply destruction,” which will change the landscape of where milk is produced.

There was also discussion of the failure of the New Frontier Bank of Greeley, which some producers estimated to have financed at least one-third of the dairy cows in Colorado, plus some dairies in adjoining states. It may be difficult for other smaller banks to meet the region’s dairy credit needs.

But dairy doesn’t stand still or operate in a vacuum, no matter the financial situation. Issues such as labor/immigration reform, dairy trade, animal disease traceability and food safety, federal orders, animal well-being and environmental regulation and future dairy innovation helped drive the milk price “elephant” from the NDLC conference for short periods of time. Watch our website (www.dairybusiness.com) for articles addressing those topics.

Management changes occurring

Echoed both at NDLC and in a study by The Hondo Group, a marketing communications company serving the ag industry, the rapid milk price decline caught many producers by surprise. Survey respondents noted that only 25% had contracted milk for 2009. At the time of the Hondo survey in March 2009, the average mailbox price was $12.05/cwt., while those who had contracted milk last fall were still enjoying a mailbox price of $18.27/cwt.

The primary difference between previous periods of low prices and today is the cost of feed.

Understandably, under these conditions, cost-cutting measures are a major focus. However, The Hondo Group study found dairy producers are also seeking tools to improve efficiency.

When asked what changes were being made on dairy operations to increase profitability under the current economic situation, producers responding to a survey by The Hondo Group said delaying equipment purchases was the primary adjustment. Several respondents also noted new facility construction delays.

Other areas of specific management changes included:

• Cow numbers: Cow number adjustments were equally split between those increasing and decreasing herd size. West Coast herds were most likely to be reducing herd size, bringing herd numbers back in line with facility capacity and aggressively culling less productive cows. East Coast and Midwest herds were increasing herd size, by pasturing dry cows and using existing facilities more efficiently.

• Labor: Of those reducing employees, the average reduction was 30% of the overall on-farm workforce. Owners/operators were completing more of the day-to-day activities themselves, cutting back hours of part-time staff.

• Feeding: Producers relied more on high-forage diets. Mineral price shopping is intensifying, but dairy producers are keeping minerals at high levels to maintain reproductive performance. Ration concentrates, protein sources and “extras” were most likely to be reduced.

• Herd health: Emphasis was placed on herd health protocols and procedures to avoid the downside risk to changes in this sensitive area. Changes to vaccination programs and other areas of herd health were not anticipated.

• Breeding: Survey respondents are mating cows to more young sires and purchasing lower-priced semen or using breeding bulls more heavily. Older proven bulls are still being used, but breeders are opting to utilize those in their own inventory and are reducing embryo transfer work. Interest was noted in genomic-tested sires and sexed semen.

Of the survey participants with more than 250 cows, 70% are looking to increase efficiency vs. just reducing costs. That creates opportunities for companies providing inputs and services who can prove their value/benefits to dairy producers. Producers are looking to those companies for ways to maximize their dairy’s return on investments.

While dairy producers focus on cutting costs and improving returns on investment, some see a light at the end of the tunnel – and it’s not an elephant equipped with a headlamp. Many anticipate this cycle reversing by 2010.

One of issues frequently arising when it comes to challenges related to animal well-being, environmental regulations and confusion surrounding technologies and practices used in modern dairy farming is that few people now have a direct link to dairy farmers. Without that personal link, communication has broken down and relationships have been lost.

Sure, we can post facts on websites, but, at best, facts only change minds. Feelings change behavior, and as sterile and impersonal as computers may seem, using “social media” may be the only chance we get to meet dairy consumers “face to face.” Internet vehicles such as YouTube, Facebook, Twitter and Flickr are adding a new personal connection dimension to communications.

Through the dairy checkoff, Dairy Management Inc. has launched “myDairy,” a social media initiative. The “myDairy” strategy includes: online monitoring of websites, blogs and other online commentary; marketing of dairyfarmingtoday.org on YouTube, Facebook and Flickr; and a password-protected toolkit to help dairy advocates tell their story online.

I participated in one of two DMI webinars describing “myDairy,” and learned a great deal. But what really opened my eyes to the need for the dairy industry to embrace social media occurred while tracking anti-animal agriculture groups on the Internet, and seeing how effective they are.

Billy Travis, a Kentucky dairy producer, National Dairy Promotion and Research Board member and chair of Dairy Management Inc.’s Producer and Industry Relations Committee, wrote a column on social media for DairyBusiness Communications. You can find that column, and more information on “myDairy,” by visiting http://dairywebmall.com/dbcpress/?p=2512.

Travis noted nearly 60% of Americans under 30 years of age say they obtain most of their national and international news online. There are an estimated 112 million bloggers; 3 billion photos are posted on Flickr; Facebook, a social networking website, has 140 million users; and LinkedIn, a business professional networking website, has 30 million users. Market research indicates more than 373 million people currently use social media. That number is expected to grow to 1 billion globally by 2012.

“With less than 2% of the U.S. population involved in farming today, many people don’t have the opportunity to visit a dairy farm to learn firsthand how we produce safe, wholesome and nutritious milk and dairy products,” Travis wrote. “That’s an important reason why social media needs to be on our radar.”

We in the dairy industry often say that if people just looked into our eyes to see our passion for farming and animals, they would understand and believe us. Social media is becoming the new “face to face.”

Milk prices have been trending lower for almost a year, and nearby contract months remain at historically low levels.Possibly five futures contract months will settle below the $11.00/cwt. price level (January to May contracts).The failure of Cooperatives Working Together (CWT) buyout announcements and high input costs to generate any sustainable rally in milk prices is causing a tremendous degree of pessimism toward the milk market.Some producer pessimism is, unfortunately, a necessary evil right now so that the necessary cow liquidation takes place to bring supply and demand back in balance.However, a high degree of producer pessimism is also incredibly dangerous, because it has the tendency to lead to major milk marketing mistakes.

These milk marketing mistakes originate from emotions that generate a “stop the pain” mentality.The current financial pain producers are experiencing is unfathomable.Milk checks aren’t coming anywhere near close to covering expenses and cash flow shortages are tremendous.Equity in the operation is being used up quickly and additional credit lines are being sought to bridge the shortfall. Emotions are high and rising, and the desire to “never have to go through this type of financial distress again” is becoming a foremost thought in many producers’ minds; understandably so.This desire to mitigate further financial distress has the potential to lead to massive amounts of forward contracting, especially when future contract months are offering historically decent value.

Milk futures contract months in August 2009 through December 2010 are offering $14.50/cwt. to almost $16.00/cwt. price levels at this time.These are $4.00 to almost $5.50 per cwt. more than the $10.00/cwt. prices producers have been experiencing on recent milk checks.This degree of premium in the market over the spot month has the potential to entice a substantial amount of forward contracting of future milk production.Producers need to pause and think about the potential consequences of any such forward contracting decision at this time.

• Is forward contracting here a good decision?

• Do the technicals and fundamentals support it?

• Is this an emotionally based decision?

These are important questions that need to be asked, due to the rollercoaster ride of emotion between extreme optimism and extreme pessimism that tends to occur at market extremes.

A cycle of emotion in a bear market

Let’s go through an example of this cycle of emotion.

At market tops, optimism is through the roof – everything is bullish so there is no way that prices can drop.Then prices start dropping. The first stage of the bear market is underway, but producers deny that the bull market is ending, and no milk is contracted.Prices continue to drop and, after a substantial slide, prices stabilize, but are not rallying strongly back.The belief still exists that prices will come back and lingering bullish fundamentals can still be touted, but “what ifs” start to pop into mind: “What if prices don’t come back?”

So some sales occur, but they tend to be small in quantity and nothing substantial.Prices continue to fall and then, eventually, stabilize. Calls that a bottom is in begin.Some sharp short-covering rallies occur, further fueling the calls that a bottom is in.Any rallies quickly reverse, the market sells off hard and new lows are made again.Early bulls turn back bearish.Desperation sets in as things look tremendously bearish: “There is no way prices will ever come back,” and a “sell-it-all” mentality starts to set in.The bottom is now in.

That is the rollercoaster ride of emotions that completes the psychological cycle of a bear market.You can see this illustrated in the chart below using the past year’s trade in the milk market.The different stages of this emotional cycle are laid out in the chart.

Bottom line, producers need to be cognizant of the emotions that he or she is presently experiencing if thoughts of forward contracting right now are coming to mind.This is not to necessarily talk you out of forward contracting, but to make you aware of the pendulum of emotion that occurs from the beginning of a bear market to the end of a bear market.

The current degree of pessimism toward milk prices suggests this bear market is in its final stage.How long this final stage lasts we cannot tell you.We cannot tell you if it will be two more months, or six more months. We cannot tell you if the price will drop $1.00 or $3.00 more per cwt., but we can say with a great degree of confidence that this is the final bear market push lower.

Ultimately, what we want to accomplish with this article is to suggest that you have a “Plan B” if you do decide to forward contract any of your milk production now.In the event that the market bottoms shortly after you sell, you absolutely need to have a strategy to protect those sales, because when the market does turn from bearish to bullish, that initial surge has the potential to be very significant in magnitude.

Does agriculture need technology to help meet the growing worldwide demand for safe, nutritious and affordable food? The answer is a resounding “yes,” according to Jeff Simmons, author of a new white paper titled “Technology’s Role in the 21st Century: Food Economics and Consumer Choice.” In his paper, Simmons provides a comprehensive review of the growing challenge of feeding the world’s population, including both historical data and projections that underscore the absolute necessity for new and existing technologies in food production.

“Already, an estimated 963 million people do not have enough to eat, and by 2050, we will need to produce 100 percent more food than we do now,” says Simmons. “We can’t achieve that by merely adding farmland or increasing crop intensity. But, we can use technology — such as advances in nutrition, disease and pest control, and livestock management — to increase productivity. Having said that, it’s imperative that we use only those innovations that have a neutral or positive effect on the environment; to do otherwise is to sacrifice our long-term survival in favor of short-term gains.”

Grain for food and fuel
Even as we balance the use of agricultural land while minimizing environmental impact, there is pressure to reallocate cropland from growing food to producing grains for biofuels. When U.S. ethanol production began ramping up in 2005, corn was less than $2 per bushel. Within two years, the price had doubled to $4 per bushel, and a year later it peaked at $8 per bushel. The U.S. Department of Agriculture (USDA) projects that about one-third of the 2009 U.S. corn crop will be converted into ethanol.

“Can we raise enough food to feed the world while helping the United States and other nations achieve a higher level of energy independence?” asks Simmons. “Yes, but only as long as we continue to invest in the technologies necessary to make ethanol production, grain production and food production even more efficient.”

The consumer perspective
Simmons also examined consumer attitudes about food safety and found that in a survey conducted by the International Food Information Council in 2008, about half of the respondents were concerned about “disease and contamination,” yet only 7 percent reported that they worried about agricultural production methods. Just 1 percent cited biotechnology as a top-of-mind concern. What consumers want most in their food is high quality and affordability.

As an example, recent polling in the United States, United Kingdom, Germany, Argentina and China identified taste, quality and price as the top considerations when choosing food products. Of these, affordability can be expected to become an increasing concern as the global economy remains in a state of heightened volatility.

“The question of how food is grown became even more relevant in 2008, when the entire world saw pressures on food production accelerate as never before,” says Simmons. “As painful as this increased focus is in industrialized nations, it can be devastating in poor nations where even modest increases in food prices can mean the difference between sustenance and starvation.”

Technological innovation as the solution
Simmons concludes that technology is an important key to meeting the global demand for food and consumer choice for three reasons. First, technology enables food producers to provide more high-quality grains and protein sources using fewer resources. For example, a combination of best-management feeding practices and efficiency-enhancing feed ingredients enables today’s cattle growers to use two-thirds less land to produce a pound of beef as it takes to produce a pound of beef from “all-natural,” grass-fed cattle.

Second, technological innovation can help keep food affordable while ensuring maximum consumer choice — especially in developing nations. While some countries’ well-designed organic systems can provide better yields and profits than traditional systems, on a global scale, organic foods come with a premium that many consumers can’t afford.

Finally, technology can help minimize the global environmental impact of increased food production. For instance, modern beef-production techniques actually reduce greenhouse gas emissions per pound of beef by 38 percent compared with “all-natural” production methods, according to a 2007 study by the Hudson Institute. Moreover, technologies such as livestock feed ingredients can help significantly reduce animal-waste production that threaten vital water resources, particularly in developing nations where modern pollution-control standards are not in use.

Creating an ultimate “win”
Simmons contends that an ultimate “win” is possible if societies focus on creating these five key achievements:
1. Improving the affordability of food by using new and existing technologies, and optimal productivity practices
2. Increasing the food supply by instituting a vastly improved degree of cooperation throughout the entire global food chain
3. Ensuring food safety via a combination of technological innovation, and high-quality standards and systems, along with more worldwide collaboration
4. Increasing sustainability through highly productive, efficient systems that simultaneously protect the environment through sensitive, efficient use of natural resources
5. Producing more biofuels to reduce dependence on fossil fuels while creating no negative effect on global food supplies

“The consequences of failing to use science-based agricultural technologies and innovations will be disastrous,” says Simmons. “Food producers in industrialized and developing nations alike require technology to ensure a sustainable supply of safe, nutritious, affordable grains and animal protein to satisfy the rapidly growing demand. That is why we all share the responsibility to make sure new agricultural technologies — as well as those proven safe and effective for decades — continue to be available.”

Elanco is a global innovation-driven company that develops and markets products to improve animal health and food-animal production in more than 100 countries. Elanco employs more than 2,000 people worldwide, with offices in more than 30 countries, and is a division of Eli Lilly and Company, a leading global pharmaceutical corporation.

To view the white paper and for additional information, visit www.elanco.com.

(Part of a series of articles produced by University of Wisconsin-Extension agents and specialists to address farming in difficult times)

With farm income down and input prices high, even the most seasoned of farm managers are being stressed. This is also when producers are asking what they can do to minimize costs and maximize income to improve margins.

At least three types or levels of budgets are useful in the farm business. A farm manager will find a combination of all three – not necessarily at the same time – to be useful since each one has different characteristics. These three types of budgets are the total farm budget, the enterprise budget and the partial budget.

An enterprise budget is an estimate of the costs and returns associated with the production of a product or products referred to as an enterprise. An enterprise, or profit center, is a distinct part of the farm business that can be analyzed separately. An enterprise is usually based on some production input unit – an acre of land for most crop enterprise budgets, or an individual animal unit for livestock enterprise budgets. Enterprise budgets are an important tool for planning and for ongoing farm financial management. Crop and livestock budgets can be used to estimate profitability, project cash flows, provide a basis for credit, and assist in farm planning.

Cost and return estimates are projections for some future time period, such as the coming calendar year or crop year. Without good, historical production and financial records, developing enterprise budgets can be time consuming and frustrating. Historical records are a useful starting point for estimating future costs. Whether you have good records or not, you may be surprised at some of the cost changes you discover and budget for in your enterprise budgets. You may also be surprised at the net returns above variable and total costs. If you do not have the financial and production records necessary to develop an enterprise budget, you can begin by using budgets from other sources, such as the University of Wisconsin-Extension, which can provide information for planning and decision making. The Enterprise Budgets section of the UW-Extension Farm Team web site (http://www.uwex.edu/ces/farmteam/index.cfm) has many examples of field crop, pasture, commercial vegetable, fresh market vegetable, dairy, and livestock budgets. If you use this method, you will need to adjust the budget to reflect your specific situation.

Budgets generally include variable operating costs, fixed costs, and expected production returns. Variable costs are those that vary with output within a production period. Examples include seed, fertilizer, chemicals, purchased feed, supplements, veterinary costs and medicines, fuel, repairs, and labor. Other terms used to describe variable costs include cash costs (or expenses), direct costs, and out-of-pocket costs. Fixed costs typically include building costs, depreciation, taxes, interest on investment, land charges, and insurance. A management fee may be included as a fixed cost. These costs are considered to be fixed because they generally remain the same within a production period and do not vary with the level of output. Indirect and overhead costs are other terms used to describe fixed costs.

Total costs are calculated by adding variable, fixed costs, and opportunity costs if not already accounted for. Ideally, you want to earn a profit above total costs every year. This is not always possible, since income received can be less than the total costs of production. Should you continue to produce under these circumstances? The answer may be yes if: (1) you are covering variable costs of production, and (2) it is a short-run condition. It is economical to continue production in the short run as long as income is higher than the variable costs of production. In other words, in the short run, you must receive a price that generates a return at least equal to variable costs. In the long run, however, market price and yield need to be high enough to cover total costs of production, including fixed costs. Otherwise, the enterprise will not be financially sound over a period of several years.

For assistance in making these tough decisions, contact your UW-Extension county agent, your Farm Business and Production Management Instructor in the Technical College or the DATCP Farm Center at 800-942-2474.

For the last couple months, I’ve been spending most of my time meeting with dairy farm workers, talking about the current dairy economy and discussing ways to improve profitability and performance. My main goal in these meetings has been to create awareness among employees of the current economic crisis and the impact they have on reducing operating costs and improving efficiency and productivity.

Surprisingly enough, many farm workers, especially Spanish-speaking employees, are not aware of what their employer is going through. In some cases, they are relatively well informed about the global economic crisis but rarely associate this with what’s happening at the dairy farm level.

Here are a few suggestions of things you should be doing to make workers aware:

• Set up a meeting with all your workers to discuss current milk prices. Be specific and give examples of how current milk prices are affecting the dairy’s profitability. You don’t need to show them your exact profit numbers if you’re not comfortable but you can use national milk prices and milk-to-feed cost ratios as examples. It is important that your employees realize the seriousness of the situation and focus on reducing costs and being more efficient.

• Discuss with them how they can help reduce costs – for example, not wasting disinfectant for pre- and post-dip, managing foot bath products better or being more conscious when using medicines. If you provide housing for employees, discuss electric and heat bills, and budget their expenses.

• One week later, meet with each team individually (milkers’ supervisor, transition cow mangers, feeders, etc.) to discuss more specific ways to reduce costs and improve efficiency in their areas. Often your employees will have good ideas, and can come up ways to save more or waste less.

Finally, if you haven’t done it yet, this can be a good time for you and your managers to develop a budget for each department within your dairy. Review the budget and goals for each sector monthly with each of your leaders to better control and monitor operating costs.

On April 14, Clint Lewis, president of the U.S. Pfizer Animal Health division, didn’t go in for a typical work day at his New York City office. Putting on a pair of work boots and coveralls, Lewis went to work on a Midwest dairy farm to prove that getting close to customers is more than just words.

To promote its DRAXXIN® (tulathromycin) Injectable Solution and its extended antibiotic therapy, Pfizer Animal Health created the DRAXXIN Goes to Work promotion and went on a nationwide search for a progressive calf operation that successfully implemented the anti-infective into its calf-care protocols.

To promote its DRAXXIN®(tulathromycin) Injectable Solution and its extended antibiotic therapy, Pfizer Animal Health created the DRAXXIN Goes to Work promotion and went on a nationwide search for a progressive calf operation that successfully implemented the anti-infective into its calf-care protocols. That’s when the company came across calf manager, Troy Ripp, and the dairy operation – Ripp’s Dairy Valley LLC – he co-owns with brothers Gary and Chuck in Dane, Wis.

“Among the nominations we received from across the nation, Ripp’s Dairy Valley stood out as one of the top players in calf care,” said Lewis. “Troy Ripp has done a phenomenal job in upholding an efficient calf operation, and we’re excited to help him with some chores. This way, he can focus on the several other things that always end up on the to-do list on the farm.”

As part of the promotion, Pfizer Animal Health provided Ripp with an executive replacement crew, including Lewis; Don Sauder, vice president of the Pfizer Animal Health U.S. cattle organization; and Mike Layfield, group director of the U.S. dairy business. The replacement crew also included members of the New York City-based marketing team, including Robbie Moody, marketing manager, as well as Doug Braun, DVM, Pfizer Animal Health veterinarian.

“Pfizer Animal Health’s goal is to get closer to our customers to better understand their needs,” explained Lewis. “What better way than to walk in their shoes for a day?”

The day began at 5 a.m. with a tour of the facility and a download on the chores that Ripp had in store for them that day.

Feeding and weaning heifer calves

In the early morning, the quiet of the barn was broken by bellowing calves ready for their first feeding. Lewis and his crew put their gloves on and went to work feeding bottles of colostrum to the younger calves.

Ripp’s calf-care protocols include feeding pasteurized heifer colostrum to calves within one hour of birth, giving them calf coats to wear to keep warm, regular cleaning of individual pens, feeding electrolytes to those with potential for scours, as well as a simple tracking system on a dry-erase board to indicate the day and time a calf was born, when they received colostrum and vaccinations.

“I can appreciate the animal husbandry skills and individualized care that these calves receive. Ripp’s Dairy Valley is truly an exemplary operation with its thorough calf-care protocols,” said Lewis.

In the past year, the Ripps lost only 9 heifer calves out of 475 born on the farm, a 1.9% death loss rate, compared to the 2007 national average of 7.8%.

U.S. Pfizer Animal Health executives helped clean and bed calf pens – a far cry from their work in the Big Apple.

As the executive replacement crew finished up the first feeding of the day, their work had only just begun. Six calves were ready to be weaned and moved into the group heifer pens located on the other side of the calf barn. Lewis and crew helped transport the calves into the next building where weaned heifers are kept in group housing.

And to prepare for new calves, the stalls needed to be cleaned, so members of the crew took apart the individual calf pens, cleared out the bedding and power-washed the panels clean – a far cry from work in the Big Apple.

News broke over the two-way radios that a cow was about to calf in the maternity pen. The crew immediately took to one of the farm’s all terrain vehicles (ATV) and retrieved the calf for processing. In the maternity pen, Ripp placed the newborn in the back of the ATV, while Lewis jumped in the driver seat and drove back to the calf facility. There, Ripp demonstrated to Lewis how to feed a newborn via an esophageal feeder. Lewis took to it right away and had no problem getting the young calf to produce an empty bottle.

“Troy showed us just how important it is to start each calf off right,” said Lewis. “Feeding newborns colostrum immediately after birth is one of the most critical things a producer can do to help them get a healthy jumpstart on life.”

Throughout the day, the replacement crew watched two calves being born and were there to help process both.

Lifetime value

Ripp realizes that the lifetime value of a calf is reflected in good calf care from the beginning, which includes anti-infective treatment for problems such as calf pneumonia or bovine respiratory disease (BRD). There’s also value in using a product that provides extended protection with one treatment.

“By treating calves once, producers can trust that the product will go to work with its extended-therapy. And in economic times like these, fewer re-treatments paired with individualized care go a long way,” said Lewis.

Background on Ripp’s Dairy Valley

The Dane, Wis. farm was established by Hardy Ripp (grandfather) in 1953 with his three sons. They started milking 140 cows 2x per day in a 66-stanchion parlor. The operation added 212 sand stalls for more cow comfort and breeding, in 1994. In 1998, the herd size was increased by 250 milking cows, added another sand-bedded freestall building. Incremental expansion continued in 1999, adding 300 more sand stalls and incorporating a double-16 parlor; adding 500 cows and milking 3X in 2000; and, in 2001, adding another 300 sand-bedded freestalls to house dry cows and post-fresh.

With the passing of their father, Gary, Chuck and Troy bought the business in 2004. They built a calf barn in 2006; and a new barn to house dry cows, hospital and pre-fresh cows was finished in November 2008.

Today, the business is owned by the three brothers. Gary is in charge of human resources, crop and machinery maintenance and manure management. Chuck is the dairy records specialist, and also is in charge of feeding and genetics. Troy in calf manager and oversees maternity pens and vaccination. Their mother, Eileen, is still “CEO,” according to the brothers.

The operation milks 815 Holstein cows 3x in a double-16 parallel parlor. The calf barn has capacity for 108 calves and 100 weaned heifer calves. Calves are raised on-site until 4 months of age, then sent to one of two custom heifer growers. The farm employs 12 people, including Sergio, Troy’s calf barn worker, and herdsman, Tim Blankenship.

The Pfizer Animal Health Dairy Wellness Plan™ is a 365-day approach to managing a dairy operation that focuses on the health of the dairy animal, the economic health of the dairy and the proper use of animal health products leading to a safe and healthy food supply.

A withdrawal time has not been established for DRAXXIN in pre-ruminating calves. DRAXXIN has a pre-slaughter withdrawal time of 18 days, and is not for use in calves to be processed for veal. For more information on the safety and use of DRAXXIN, refer to draxxin.com.

For more information on the safety and use of DRAXXIN, refer to draxxin.com .For additional information on Pfizer Animal Health’s portfolio of animal products, visit www.PfizerAH.com.

Under today’s economic pressures, dairy producers aren’t just looking for ways to cut costs, but also want help improving returns on investments.

As seen in recent months, milk prices have dropped as much as 45%.A recent study by The Hondo Group, a marketing communications company serving the agriculture industry, indicates that while cost cutting is a major focus, seeking tools to improve efficiency are also high on a dairy manager’s priority list.

Survey respondents noted that only 25% had contracted milk for 2009, as the rapid price decline caught many producers by surprise.

Survey respondents noted that only 25% had contracted milk for 2009, as the rapid price decline caught many producers by surprise. 2008 milk prices ranged from $14.58-$20.26/cwt. while February 2009 milk prices ranged from $9.46-$17.75/cwt. The average mailbox price at the time of the survey was $12.05/cwt., while those who had contracted were enjoying a mailbox price of $18.27/cwt.

The primary difference between previous periods of low milk prices and today is the cost of feed. With the milk-feed price ratio at an all-time low through the first quarter of 2009, the cost-income squeeze is more severe.

Most dairy producers have weathered the low milk price storm before, as the survey reports. In 2002-2003, milk prices hovered around $10/cwt. for more than a year before rebounding in early 2004. The primary difference between that period and today is the cost of feed. With the milk-feed price ratio at an all-time low through the first quarter of 2009, the cost-income squeeze is more severe.

One might presume that producers are focused on reducing costs. But surprisingly, the study reveals that a majority are choosing to focus on the value/benefits they can realize, thus creating an opportunity for companies providing inputs and services to strengthen their relationships between dairy producers, looking for ways to maximize a dairy’s return on investments.

Of the survey participants with more than 250 cows, 70% are looking to increase efficiency vs. just reducing costs.

Producers identified specific management changes they will make due to the dairy economy.

Making changes

When asked what changes are being made on the operation to increase profitability, dairy producers report delaying equipment purchases as the primary adjustment. Several respondents also note new facility construction delays. Other areas of specific management changes include:

• Cow adjustment numbers were equally split between those increasing and decreasing herd size. West coast herds were most likely to be reducing herd size, bringing herd numbers back in line with facility capacity and aggressively culling less productive cows.East coast and Midwest herds were increasing herd size, by pasturing dry cows and using existing facilities more efficiently.

• Of those reducing employees, the average reduction was 30% of the overall on-farm workforce.Owners/operators were completing more of the day-to-day activities themselves as they are cutting back hours of part-time staff. A majority noted the possibility of additional cuts in the future.

• Producers are relying more on high-forage diets. Where mineral price shopping is intensifying, but dairy producers are keeping minerals at high levels to maintain reproductive performance is important.Concentrates, protein sources and “extras” were most likely to be reduced.

• Change to vaccination programs and other areas of herd health are not anticipated.Emphasis was placed on herd health protocols and procedures to avoid the downside risk to changes in this sensitive area.

• Survey respondents are mating cows to more young sires and purchasing lower-priced semen or using breeding bulls more heavily on their farm.Older proven bulls are still being used, but breeders are opting to utilize those in their own inventory and are reducing embryo transfer work.Interest was noted in genomic tested sires and sexed semen.

While dairy producers are prioritizing on their return on investment (ROI) and value/benefits more than just the cost of a product or service, they are seeing the light at the end of the tunnel.Many anticipate this cycle reversing before the end of 2009.

Based on the survey findings, herd managers are encouraged to have a firm grasp on their cost of production. While no one wants to think about the unexpected, it is vital to monitor daily inputs on the dairy and be prepared to handle the inevitable ups and downs of the dairy market.

The summary from the dairy economic study reports 36% response rate covering dairy producers from eight states across the country. The average respondent age was 40 years old, with more than 20 years in the dairy business. Herd sizes ranged from 25 to 3,600 cows with an average of 395 cows and 347 heifers.

The summary from the dairy economic study reports 36% response rate covering dairy producers from eight states across the country.The average respondent age was 40 years old, with more than 20 years in the dairy business. Herd sizes ranged from 25 to 3,600 cows with an average of 395 cows and 347 heifers.

“The world has a habit of making room for the man who has a plan, knows where he is going, and then takes steps to reach his desired destination.” – Basil Walsh, author

John Ellsworth of Modesto, Calif., is a consultant with the financial and strategic consulting firm Success Strategies. Reach him via phone: 209-988-8960, or by e-mail: jc4success@msn.com.

By John Ellsworth

In my last article, I noted that the dairy industry is in some very difficult times. Writing this article in mid-March, I’m hopeful there will be some relief on milk prices by summer. Class III futures are increasing and are presently over $15/cwt. starting in October. This is a good time to be asking: What will it take for my dairy business to survive? What steps will I need to take to ensure future success? While these are always a great questions to ask, there has never been a more ideal time to consider them than now.

Profitability

What is your return on assets (net income/total assets)? How are you doing on return on investment (net income/net worth)? These should be 10% and 15%, respectively. While these are just two benchmarks to consider, they represent your best measures of profitability.

Another important measure is your debt service coverage ratio. This is determined by dividing your net cash flow (net income + depreciation) by your current portion of long term debt (CPLTD).

CPLTD is the amount of principal you are required to pay annually on your term loans. This includes the principal payments made each year for real estate, herd, equipment and vehicle loans. Most banks want this ratio to be at least 1.25, leaving you a 25% margin of cash flow over the amount of principal you must repay each year. However, I have seen banks lower this to 1.10 when cash flow is tight.

Liquidity

The best three measures of liquidity are working capital, debt to net worth, and term debt/cow. Working capital equals your current assets (checking account balance, milk A/R’s, feed inventory, and investment in crops) minus your current liabilities (accounts payable, feed & crop lines of credit, the CPLTD mentioned above, and any other short term liabilities you may have). You want this number to be positive and the larger it is, the more liquidity your business has. Strong liquidity is positive since it enables you to weather downturns.

Debt

Debt/cow (total term loans/number of cows) and debt to net worth (total liabilities/net worth) are measures of how much debt your business is carrying. Of course, less debt is usually better. However, it actually depends upon how your debt load is structured. If your debt consists mostly of long term (20 to 25 years) real estate loans, you will be positioned to handle a higher debt load per cow than someone who has their term debt on a seven-year herd loan or on five-year equipment loans.

Rather than using an absolute debt/cow figure, look at your trend over the past five years. Is your leverage increasing because you’ve lost money and have had to borrow more? Or is it higher because you remodeled your milking barn to improve your efficiencies, such as cows milked/hour?

Speaking of efficiency, look at your pounds of milk per cow. Are you more or less efficient than others in your area? How do you compare on cows per full-time employee? Is your daily milk shipped increasing? All of these factors impact your costs per cwt. and are important.

While there are many measures to use in evaluating the success levels of your dairy operation, these are some you can use regularly to check your progress. Success, as with many things in life, is primarily a matter of knowing where you want to go, setting a plan and then measuring your progress toward those goals.